AMD's hired guns

Here’s another thing to consider when evaluating AMD’s current position in the market:  Outsourcing. AMD’s top executive, Hector Ruiz, hinted about a potential new directing for the chipmaker during its earnings call on April 19. (You can view the transcript courtesy of SeekingAlpha, here.) Ruiz indicated AMD was exploring the idea of using more outsourced manufacturing for its x86 processors. This is not significantly different than AMD's current model, which uses foundry Chartered Semiconductor to supply Athlon 64 X2 and Sempron processors. Instead, what Ruiz was hinting at is the potential for AMD to increasing its use of chip foundries.

Foundries are the hired guns of chipmaking, producing processors for clients who either don’t have or don’t wish to invest in their own manufacturing. But, of late, big-name chipmakers such as Texas Instruments have been relining on foundries more heavily due to the rising costs of building semiconductor manufacturing plants.

Going forward, I believe that AMD will continue to have a hybrid manufacturing model. It will use its in-house capacity to produce its most cutting-edge processors. I expect it to continue manufacturing its Opteron server chips, along with its high-end desktop and notebook processors, in-house. This gives AMD the largest-possible degree of control over those products. The high-end parts are vital to its business. I see it having a hard time entrusting them to someone else. But, as the company works to keep a handle on costs and also as its share grows, it makes sense for AMD to consider outsourcing a larger portion of the manufacturing of its lower-end PC processors as well as its Geode chip line. It may also, as Ruiz hinted, develop and market all new processors, such as low-price parts for emerging markets, which could be produced by manufacturing partners.

AMD has begun getting a handle on working with foundries. Aside from its relationship with Chartered, it inherited relationships with TSMC and UMC, the world’s two largest foundries. TSMC and UMC manufacture ATI’s various products. While Chartered has all of its x86 processor business, it’s possible that AMD could utilize TSMC or UMC to build future x86 processors as well. Meanwhile, IBM could also serve as a foundry partner for AMD as well. Due to their collaboration, IBM and AMD’s 45nm processes, for one, appear to be very similar.

But there’s one thing I don’t see AMD outsourcing. That’s its research and development. While it’s true that AMD continues to work with IBM to develop chip manufacturing processes, there’s nothing that would indicate AMD is moving to outsource its processor R&D. Processor design is AMD’s crown jewel. It’s beefed up its R&D capacity, there, over the past few years. I just don’t see the company reversing that trend and relying on anyone else. The company may shift its R&D operations geographically, however. If AMD is seeking to design processors specifically for emerging markets, it makes sense to gain the perspective of engineers and designers who live and work in those markets. But that doesn’t mean AMD will disband its U.S.-based design teams either.